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ESOP Fiduciary Duties After Dudenhoeffer

Posted by Corey F. Schechter | Aug 02, 2017

The Supreme Court has offered some guidance and clarification on the fiduciary standards for Employee Stock Ownership Plans (ESOPs). After the 2014 Dudenhoeffer decision, ESOP fiduciaries lost their presumption of prudence that protected most ESOP fiduciary decisions. However, the Court also raised the pleading standard for plaintiffs, making it more difficult to bring lawsuits for breach of fiduciary duty against ESOPs dealing in publicly-traded company stock.

Under ERISA, there is a fiduciary duty for those who administer, manage, or control plan assets. Fiduciaries are required to act solely in the interest of plan participants and beneficiaries. This generally requires fiduciaries to diversify investments. However, ESOPs are different because they invest primarily in employer stock. This can create additional challenges for ESOP fiduciaries.

Prior to 2014, ESOPs had a presumption of prudence in their decisions to buy, sell, or hold employer stock because ESOPs were required to invest primarily in company stock. This was known as the Moench presumption, after a 1995 Third Circuit case.

In the Ninth Circuit case of Fifth Third Bancorp v. Dudenhoeffer, plan participants in the company's retirement plan brought an action against the plan fiduciaries for breach of fiduciary duty. The participants alleged inside information known to the fiduciaries showing the company stock was overvalued. They argued a prudent fiduciary would have used this information to sell ESOP holdings in company stock, stopped purchasing additional company stock, or disclosed the information so the ESOP could purchase company stock at an uninflated price.

The Court disagreed with the plan participants. The Court found ESOP fiduciaries were not entitled to a presumption of prudence and were subject to the same standards of other ERISA fiduciaries, except for the requirement to diversify assets. However, the decision also raised the pleading standards for plaintiffs seeking a breach of fiduciary duty claim against plan administrators.

“To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

In another Ninth Circuit case Amgen Inc. v. Harris, the District Court attempted to apply the Dudenhoeffer pleading standard. The Supreme Court took up the case of Amgen, finding the Ninth Circuit failed to properly evaluate Amgen and used it to clarify the new pleading standard against ESOP fiduciaries.

In evaluating stock-drop ESOP fiduciary cases, lower courts should consider “whether the complaint has plausibly alleged that a prudent fiduciary in the defendant's position could not have concluded” that the alternative action would do more harm than good to the fund.

The new pleading standard may make it more difficult for plaintiffs to plead fiduciary breach cases against ESOP fiduciaries dealing in company stock. However, ESOP fiduciaries should also take additional steps to reduce fiduciary liability. This includes avoiding conflicts of interest, seeking independent fiduciary guidance, and documenting decision-making and steps taken in evaluating company stock purchases. Companies can also reduce potential liability by using independent trustees to administer company ESOP plans.

If you have any questions about ESOP fiduciary duties in light of current case law, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law and ERISA. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.


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